The average true range is a volatility indicator. It measures the average of true price ranges over time. The True Range is the greatest distance between today’s high to today’s low, yesterday’s close to today’s high, or Yesterday’s close to today’s low.

How does it work?

ATR is an indicator that measures the volatility & was developed by Welles Wilder. Wilder designed ATR basically for commodities’ trading as commodities are more volatile than stocks.

Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis.

To understand the indicator better, here is how it is calculated.

Finding the A, or the average, first requires finding the True Range (TR).

The TR is the greatest of the following:

Current high minus the previous close.

Current low minus previous close.

Current high minus current low.

Traders can use shorter periods to generate more trading signals, while longer periods have a higher probability to generate less trading signals.

The average true range (ATR) is a great tool for determining the level of volatility.

To calculate the average true range, you take the average of each true range value over a fixed period of time.

If using the ATR on an intraday chart, such as a one or five minute, the ATR will spike higher right after the market opens.

This is because when using a one-minute chart the indicator is tracking how much each one-minute bar moves. Since the open is the most volatile time of day, ATR moves up to show that volatility is higher than it was at yesterdays close.

The average true range indicator is an oscillator, meaning the ATR will oscillate between peaks and valleys.